Goldman Sachs Betting $10 Million on New York City Jail Programs

Mayor Bloomberg and Goldman Sachs are teaming up to run the government like a business, with private sector profits dependent on helping the public good. The plan, as reported in the Times today, will make New York the first city in the United States to use “social impact bonds” in an attempt to rehabilitate prisoners and drop recidivism rates. Goldman’s $9.6 million loan will go toward a four-year program at Rikers Island, where almost 50 percent of young men released go on to re-offend within a year. If that rate drops, Goldman wins, but either way, the thinking goes, they look pretty good for beinginvolved.

The risk is minimalanyway:

The money is not a huge amount for Goldman, which last month reported over $900 million in second-quarter profit, and the investment promises a public-relations benefit for the Wall Street bank. For the city, the money allows the Bloomberg administration to demonstrate, and test, several of its priorities: enlisting private sector help in financing public needs, and tying program money to rigorous outcomeevaluations.

The Goldman money will be used to pay MDRC, a social services provider, to design and oversee the program. If the program reduces recidivism by 10 percent, Goldman would be repaid the full $9.6 million; if recidivism drops more, Goldman could make as much as $2.1 million in profit; if recidivism does not drop by at least 10 percent, Goldman would lose as much as $2.4million.

Through Bloomberg Philanthropies, the mayor is backing the whole thing with a $7.2 million loan guarantee to MDRC, which can be used to repay Goldman in the event of failure. If it works, the Department of Correction paysup.

But not everyone thinks the move toward privatization is a good thing. “I’m not saying that the market is evil,” explained professor Mark Rosenman, “but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.” With money on the line, that could manifest itself through fudged evaluations. (Update:In the words of another skeptic, ” it is critical that outcomes be measured and marked to an appropriate, randomized, control group. If not carefully monitored, the private sector will also excel at innovative and creative gaming at the publicexpense.”)

Still, as the first experiment with so-called “pay-for-success bonds” in the country, the program is being seen as a blueprint. For Goldman, it’s small potatoes financially and good optics, but for Bloomberg and his Young Men’s Initiative, it’s about leaving alegacy.